Protect your business from cashflow crises by following these cash management tips.
1. Cash flow isn’t intuitive
Don’t try to do it in your head. Making the sales doesn’t necessarily mean you have the money. Incurring the expense doesn’t necessarily mean you have paid for it already. Stock is usually bought and paid for and then stored until it is sold – which might not be for some time..
2. Growth sucks up cash
The best of times can be hiding the worst of times. Yes, of course you want to grow; we all want to grow our businesses. But be careful because growth costs cash. It’s a matter of having sufficient working capital. The faster you grow, the more cash you will need to fund the outgoings before the cash from sales comes back in.
3. Business-to-business sales suck up your cash
The simple view is that sales mean cash, but it’s rarely that simple when you’re a business selling to another business. You deliver the goods or services along with an invoice – but in most cases they won’t pay the invoice until later. In some sectors 90 days credit terms are common – that’s a three month wait to be paid, which may be many more monts since you originally paid for the stock you sold them. You need to know how you’re going to fund that intervening period.
4. Watch these three vital metrics
“Collection days” – how long customers take to pay your invoices.
“Stock or inventory turnover” – how long your stock sits on the shelves and clogs your cash flow.
“Payment days” – how long you wait to pay your suppliers. Ideally, you want to match your collection and payment days so your customers effectively provide the funds to enable you to pay your suppliers. Otherwise you’ll need to raise capital or bank borrowing to bridge the gap.
Continuously monitor these three vital cash flow statistics. Then, project them 12 months ahead, compare your plan to what actually happens and update the forecast in the light of experience.
If you’d like to talk to us about how we can help you improve your cashflow management, get in touch now.